{"id":46027,"date":"2025-06-23T20:48:48","date_gmt":"2025-06-23T15:18:48","guid":{"rendered":"https:\/\/www.nextias.com\/ca\/?p=46027"},"modified":"2025-06-24T17:06:28","modified_gmt":"2025-06-24T11:36:28","slug":"expansionary-policies-in-a-slowing-economy","status":"publish","type":"post","link":"https:\/\/www.nextias.com\/ca\/current-affairs\/23-06-2025\/expansionary-policies-in-a-slowing-economy","title":{"rendered":"Expansionary Policies in a Slowing Economy"},"content":{"rendered":"\n<p><strong>Syllabus: GS3\/Economy<\/strong><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Context<\/strong><\/h2>\n\n\n\n<ul class=\"wp-block-list\">\n<li>India is currently witnessing a rare phase where both <strong>fiscal and monetary policies are expansionary.<\/strong>\n<ul class=\"wp-block-list\">\n<li>While this approach aims to revive aggregate demand in a slowing economy, it also brings the<strong> risk of inflation, policy misalignment, and fiscal stress.<\/strong><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Key Policies Adopted Recently<\/strong><\/h2>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>In <a href=\"https:\/\/www.nextias.com\/union-budget\" data-type=\"link\" data-id=\"https:\/\/www.nextias.com\/union-budget\">Union Budget 2025\u201326<\/a>,<\/strong> \u20b911.21 lakh crore earmarked for infrastructure, agriculture, MSMEs, and digital connectivity (strong emphasis on capital expenditure).<\/li>\n\n\n\n<li><strong>Income Tax cuts<\/strong> announced were intended <strong>to boost consumption<\/strong> during a slowdown.<\/li>\n\n\n\n<li>RBI cut the <strong>repo rate to 5.5% <\/strong>to encourage borrowing and investment amid slowing growth.<\/li>\n\n\n\n<li>The <strong>RBI\u2019s dual mandate <\/strong>\u2014 price stability and growth \u2014 has led to:\n<ul class=\"wp-block-list\">\n<li>Rate cuts to encourage borrowing.<\/li>\n\n\n\n<li>Inflation targeting, with retail inflation falling to 4.6% in 2024\u201325.<\/li>\n\n\n\n<li>Liquidity support for financial institutions and NBFCs.<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Issues &amp; Challenges<\/strong><\/h2>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>Lack of Policy Coordination:<\/strong> If both policies work together without coordination, it might overheat the economy causing inflation.\n<ul class=\"wp-block-list\">\n<li>Despite these policies, growth is still slow, credit growth is weak, and unemployment is rising.<\/li>\n<\/ul>\n<\/li>\n\n\n\n<li><strong>Muted Demand Response:<\/strong> People are not spending much, even with tax cuts. This challenges the Rational Expectations Theory (core to inflation targeting)<\/li>\n\n\n\n<li><strong>Widening Fiscal Deficit Risk:<\/strong> If growth doesn\u2019t rise, tax revenue will fall, <strong>leading to a fiscal deficit. <\/strong>To plug the gap, the government may have to cut welfare spending, hurting vulnerable groups.<\/li>\n\n\n\n<li><strong>Rising Inequality and Weak Wages: <\/strong>Corporate profits rising, but real wages stagnant. Expansion policies may benefit capital more than labour.<\/li>\n<\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Instances of Expansionary Policies Adopted in Past<\/strong><\/h2>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>The New Deal (1930s):<\/strong> By the <strong>United States<\/strong>, in response to the Great Depression.<\/li>\n\n\n\n<li><strong>Post-2008 Global Financial Crisis<\/strong>: By Central Banks and US Federal Reserve; Slashed<strong> interest rates to near zero<\/strong> and introduced <strong>quantitative easing <\/strong>\u2014 buying government securities to inject liquidity into the economy.\n<ul class=\"wp-block-list\">\n<li><strong>In India, <\/strong>RBI <strong>slashed the repo rate<\/strong> from 9% in 2008 to 4.75% by April 2009.<\/li>\n<\/ul>\n<\/li>\n\n\n\n<li><strong>Japan\u2019s Abenomics (2012\u20132020): <\/strong>Three-pronged strategy:\n<ul class=\"wp-block-list\">\n<li>Monetary easing by the Bank of Japan;<\/li>\n\n\n\n<li>Fiscal stimulus through government spending; and<\/li>\n\n\n\n<li>Structural reforms to revive Japan\u2019s stagnant economy.<\/li>\n<\/ul>\n<\/li>\n\n\n\n<li><strong>COVID-19 Pandemic Response (2020\u20132021):<\/strong>\n<ul class=\"wp-block-list\">\n<li>Massive <strong>fiscal stimulus packages <\/strong>\u2014 direct cash transfers, unemployment benefits, and business loans \u2014 while <strong>central banks cut interest rates<\/strong> and expanded asset purchases to cushion the economic blow.<\/li>\n\n\n\n<li><strong>India<\/strong> rolled out the <strong>Aatmanirbhar Bharat Abhiyan<\/strong>, a \u20b920 lakh crore package<\/li>\n\n\n\n<li><strong>Other steps:<\/strong>\n<ul class=\"wp-block-list\">\n<li>Repo rate cuts to a historic low of 4%.<\/li>\n\n\n\n<li><strong>Loan moratoriums and liquidity support <\/strong>for NBFCs and housing finance companies.<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Benefits of Expansionary Policies in India<\/strong><\/h2>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>Boosts Aggregate Demand:<\/strong> Expansionary fiscal policies like tax cuts and increased public spending raise disposable incomes and consumption.\n<ul class=\"wp-block-list\">\n<li>Similarly, lower interest rates encourage borrowing and investment, helping revive demand across sectors.<\/li>\n<\/ul>\n<\/li>\n\n\n\n<li><strong>Supports Employment:<\/strong> Government-funded infrastructure projects and MSME support schemes can generate jobs, especially in rural and informal sectors, reducing unemployment during downturns.<\/li>\n\n\n\n<li><strong>Encourages Private Investm<\/strong><strong>ent: <\/strong>Lower borrowing costs and improved consumer sentiment can incentivize businesses to invest in capacity expansion, innovation, and hiring.<\/li>\n\n\n\n<li><strong>Stabilizes Financial Markets:<\/strong> Liquidity injections by the RBI and credit guarantees for NBFCs and banks help maintain financial stability and prevent credit crunches.<\/li>\n\n\n\n<li><strong>Short-Term Economic Relief:<\/strong> During emergencies like the COVID-19 pandemic, direct cash transfers and food security measures provided immediate relief to vulnerable populations.<\/li>\n<\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Way Forward&nbsp;<\/strong><\/h2>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>Strengthen Policy Coordination Mechanism:<\/strong> Institutionalised dialogue between RBI and Ministry of Finance.<\/li>\n\n\n\n<li><strong>Prioritise Targeted Transfers: <\/strong>Increase DBTs and wage support schemes to boost bottom-up demand.<\/li>\n\n\n\n<li><strong>Revise Tax Structures Holistically:<\/strong> Combine income tax relief with indirect tax (GST) rationalisation.<\/li>\n\n\n\n<li><strong>Monitor Inflation Proactively:<\/strong> Pre-emptively tighten monetary policy if demand-pull inflation rises.<\/li>\n<\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Conclusion<\/strong><\/h2>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Expansionary policies have played a vital role in India\u2019s economic management, especially during crises. However, their success depends on timing, targeting, and coordination.<\/li>\n\n\n\n<li>Policymakers need to balance short-term stimulus with long-term fiscal prudence and structural reforms to ensure sustainable growth.<\/li>\n<\/ul>\n\n\n\n<figure class=\"wp-block-table\"><table class=\"has-background\" style=\"background-color:#ebecf0\"><tbody><tr><td><strong>Fiscal Policy<\/strong><br>&#8211; It refers to the<strong> government&#8217;s use of taxation and public spending<\/strong> to influence the economy.<br>&#8211; <strong>Expansionary Fiscal Policy <\/strong>involves <strong>increasing government spending or cutting taxes<\/strong> to stimulate demand.<br>&#8211; <strong>Contractionary Fiscal Policy means reducing spending or increasing taxes<\/strong> to cool down an overheating economy or reduce fiscal deficits.<br>1. The government uses<strong> fiscal responsibility frameworks<\/strong>, such as the <strong>FRBM Act<\/strong>, to maintain long-term macroeconomic stability.<br><strong>Monetary Policy<\/strong><br>&#8211; It is<strong> managed by the Reserve Bank of India (RBI)<\/strong> and involves <strong>regulating interest rates and money supply<\/strong> to maintain price stability and support growth.<br>&#8211; <strong>Expansionary Monetary Policy:<\/strong> By <strong>lowering interest rates<\/strong> or conducting <strong>open market operations<\/strong> to inject liquidity.&nbsp;<br>&#8211; <strong>Contractionary Monetary Policy:<\/strong> It involves raising interest rates or reducing money supply, used <strong>to curb inflation.<\/strong><\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n<p><a href=\"https:\/\/www.thehindu.com\/business\/Economy\/expansionary-policies-in-a-slowing-economy\/article69725395.ece\" rel=\"nofollow noopener\" target=\"_blank\">Source: TH<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"<h3><strong>Context<\/strong><\/h3>\n<li class=\"ms-5\">India is currently witnessing a rare phase where both fiscal and monetary policies are expansionary.<\/li>\n<p><\/p>\n<h3><strong>Benefits of Expansionary Policies in India<\/strong><\/h3>\n<li class=\"ms-5\">Boosts Aggregate Demand: Expansionary fiscal policies like tax cuts and increased public spending raise disposable incomes and consumption.<\/li>\n<li class=\"ms-5\">Similarly, lower interest rates encourage borrowing and investment, helping revive demand across sectors.<\/li>\n<li class=\"ms-5\">Supports Employment: Government-funded infrastructure projects and MSME support schemes can generate jobs, especially in rural and informal sectors, reducing unemployment during downturns.<\/li>\n<li class=\"ms-5\">Encourages Private Investment: Lower borrowing costs and improved consumer sentiment can incentivize businesses to invest in capacity expansion, innovation, and hiring.<\/li>\n<p><a href=\"https:\/\/www.nextias.com\/ca\/current-affairs\/23-06-2025\/expansionary-policies-in-a-slowing-economy\" class=\"btn btn-primary btn-sm float-end\">Read\u00a0More<\/a><\/p>\n","protected":false},"author":15,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[21],"tags":[],"class_list":["post-46027","post","type-post","status-publish","format-standard","hentry","category-current-affairs"],"acf":[],"jetpack_featured_media_url":"","_links":{"self":[{"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/posts\/46027","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/users\/15"}],"replies":[{"embeddable":true,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/comments?post=46027"}],"version-history":[{"count":3,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/posts\/46027\/revisions"}],"predecessor-version":[{"id":46121,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/posts\/46027\/revisions\/46121"}],"wp:attachment":[{"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/media?parent=46027"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/categories?post=46027"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/tags?post=46027"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}